Feeds:
Posts
Comments

Archive for October, 2011

At least according to the latest Kauffman survey of economics bloggers by Tim Kane. Here’s the word cloud of responses when the bloggers (including me) were asked for up to five adjectives to describe the U.S. economy in Q4 2011:

Comparing this to the last survey in July, the good news is that “vulnerable” has gotten smaller. The bad news is that “recovering” has disappeared (at least I couldn’t find it):

Read Full Post »

In an excellent new paper, Jim Hamilton asks whether the “phenomenal increase in global crude oil production over the last century and a half” reflects technological progress or good fortune in finding new reserves. The two aren’t completely distinct, of course. Better technology helps find more resources. But the heart of the question remains: have we been lucky or good?

Based on a careful reading of production patterns in the United States and around the world, Jim concludes that we’ve been both and worries that the luck part may be coming to an end:

My reading of the historical evidence is as follows. (1) For much of the history of the industry, oil has been priced essentially as if it were an inexhaustible resource. (2) Although technological progress and enhanced recovery techniques can temporarily boost production flows from mature fields, it is not reasonable to view these factors as the primary determinants of annual production rates from a given field. (3) The historical source of increasing global oil production is exploitation of new geographical areas, a process whose promise at the global level is obviously limited.

Most economists view the economic growth of the last century and a half as being fueled by ongoing technological progress. Without question, that progress has been most impressive. But there may also have been an important component of luck in terms of finding and exploiting a resource that was extremely valuable and useful but ultimately finite and exhaustible. It is not clear how easy it will be to adapt to the end of that era of good fortune.

These arguments should be familiar to anyone who’s followed the peak oil debate, but Jim brings a welcome rigor to the discussion.

He also includes some charts illustrating how various states and regions have passed their production peaks. Here, for example, are the United States, North Sea, and Mexico:

And he discusses how oil prices affect the economy. All in all, a great survey.

P.S. If you are interested in the details, Jim’s post over at Econbrowser sparked some thoughtful comments.

Read Full Post »

Happy Anniversary, Tax Reform

Twenty-five years ago today, President Ronald Reagan signed the Tax Reform Act of 1986 into law.

Happy silver anniversary, tax reform!

Over at the Tax Policy Center, Len Burman and Gene Steuerle, both Treasury staffers at the time, and Howard Gleckman, who covered the proceedings for BusinessWeek, offer personal reflections on how TRA86 happened and what that means for today’s efforts.

Gene offers a recipe for increasing the odds of productive tax reform:

If there is any lesson from TRA86, it is that  real reform requires channeling forces and information in the right  direction.

Put more broadly, it isn’t helpful to  try to recreate  historical circumstances to get the same outcome.   It is far more useful to understand how to  convert luck into serendipity to increase the odds that good things will happen.

In a recent testimony and a Tax Notes article, I outlined ten steps that increased the chances of reform in 1986 and for the most part are repeatable today.  These include;  seize today’s, not yesterday’s opportunities; rely on principles like equal justice under the law to determine what should be done; make reform comprehensive, in part, because the political cost is likely to be the same in any case; shift the burden of proof to those opposing the better system; form liberal-conservative coalitions in areas where both sides can gain something;  plan strategies in advance for  how to best present the proposals and their effects  to the public; empower nonpartisan staffs like Treasury’s Office of Tax Policy and the Joint Committee on Taxation (who really assembled the ’86  reform); establish leadership on a variety of fronts;  insure accountability so that very specific political leaders bear a significant cost if reform fails; and empower someone to run with the ball and strategize on how to make reform happen.

In 1984 through 1986, much of the political leadership came late to  the game.  And some of the lessons of 1986  were learned, not planned. For example, one key to passage was that at each step in the process, first Treasury Secretary Don Regan, then House Ways & Means Committee Chair Dan Rostenkowski, and finally Senate Finance Committee Chair Bob Packwood feared they would be blamed if the bill failed. As a result, each worked extremely hard to  make sure that tax reform did not die on their watch.

Len agrees on the need, but is feeling a bit more gloomy:

Tax reform has never been more necessary, it’s hard to see a solution to our budget problems without it, and it’s just impossible.

And Howard points to the president–whoever that might be–as the key to the Tax Reform Act of 2013:

Tax reform will make nearly everyone mad. Big-bucks subsidies will be slashed or killed. Political demagoguery will run wild. The Reagan Administration saw that reform would only work if it began with a very specific plan that the White House owned. And President Reagan eventually became its best salesman. My Tax Policy Center colleague Gene Steuerle—who helped write TRA 86—always says the secret to success in Washington is writing the first draft. Put it this way: President Obama’s health reform strategy, which left the dirty work to Congress, is not the way to go.

Read Full Post »

Judging by all the ads I saw on my commute this morning, Capital One has rolled out a new marketing campaign. At least half-a-dozen ads on my Metro car announced that Capital One offers interest rates that are five times higher  than offered by their competitors:

And what is that 5x interest rate? Just one percent.

Such are times–and bank marketing–when short-term rates are almost zero.

Read Full Post »

Reed Hastings, CEO of Netflix, gave subscribers some good news yesterday:

We are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password … in other words, no Qwikster.

As a long time subscriber, I can only say Hallelujah.

But I am not surprised. Hastings has changed course sharply before. Most famously, he killed off a set-up box–the Netflix Player–just weeks before its scheduled launch. I take that as a sign of great leadership. As I wrote two years ago:

Reed Hastings is not a man who gets locked in by sunk costs: he’s willing to kill projects … even if he’s got years invested in them.

That’s a real strength. I am sure he regrets the decision to move toward Qwikster, but kudos to him for reversing course.

P.S. Netflix’s corporate culture was the subject of one of my most popular posts. Favorite line: “Adequate performance gets a generous severance package.”

Read Full Post »

Because they developed methods to help distinguish between cause and effect in the macroeconomy.

The Royal Swedish Academy of Science released a very readable account of their contributions here. Here’s the introduction:

The economy is constantly affected by unanticipated events. The price of oil rises unexpectedly, the central bank sets an interest rate unforeseen by borrowers and lenders, or household consumption suddenly declines. Such unexpected occurrences are usually called shocks. The economy is also affected by more long- run changes, such as a shift in monetary policy towards stricter disinflationary measures or fiscal policy with more stringent budget rules. One of the main tasks of macroeconomic research is to comprehend how both shocks and systematic policy shifts affect macroeconomic variables in the short and long run. Sargent’s and Sims’s awarded research contributions have been indispensable to this work. Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy.

One difficulty in attempting to understand how the economy works is that the relationships are often reciprocal. Is it policy that influences economic development or is there a reverse causal relationship? One reason for this ambiguity is that both private and public agents actively look ahead. The expectations of the private sector regarding future policy affect today’s decisions about wages, prices and investments, while economic-policy decisions are guided by expectations about developments in the private sector.

A clear-cut example of a two-way relationship is the economic development in the early 1980s, when many countries shifted their policy in order to combat inflation. This change was primarily a reaction to economic events during the 1970s, when the inflation rate increased due to higher oil prices and lower produc- tivity growth. Consequently, it is difficult to determine whether the subsequent changes in the economy depended on the policy shift or on underlying factors beyond the control of monetary and fiscal policy which, in turn, gave rise to a different policy. One way of studying the effects of economic policy would be to carry out controlled experiments. In practice, however, varying policies cannot be randomly assigned to different countries. Macroeconomic research is therefore obliged to use historical data. The laureates’ foremost contribution has been to show that causal macroeconomic relationships can indeed be analyzed using historical data, even in cases with two-way relationships.

There are good reasons to believe that unexpected shifts in economic policy may have other effects than anticipated changes. It is not trivial, however, to distinguish between the outcomes of expected and unexpected policy. A change in the interest rate or tax rate is not the same as a shock, in the sense that at least part of the change might be expected. This is a longstanding insight in the context of the stock market. A firm which reports improved earnings and higher forecasted profits might still encounter a drop in its share price, simply because the market expected an even stronger report. Moreover, the effects of an unanticipated policy shift might depend on whether it was implemented independently of other shocks in the economy or was a reaction to them.

Sargent’s awarded research concerns methods that utilize historical data to understand how systematic changes in economic policy affect the economy over time. Sims’s awarded research instead focuses on distinguishing between unexpected changes in variables, such as the price of oil or the interest rate, and expected changes, in order to trace their effects on important macroeconomic variables. The questions which the laureates have dealt with are obviously interrelated. Although Sargent and Sims have carried out their research independently, their contributions are complementary in many ways.

Read Full Post »

Jeffrey Gettleman has penned a fascinating piece about the 388-day ordeal of two British sailors taken hostage by Somali pirates. Writing in the New York Times Magazine, he recounts how Paul and Rachel Chandler sailed off course between the Seychelles and Tanzania and found their sailboat boarded by ten pirates.

Their first order of business? Eating the Chandler’s cookies and using their shower. Piracy is not a glamorous occupation.

In addition to documenting the personal travails the Chandlers endured during their captivity, Gettleman also reports on the economics of the hostage-taking business. The payoffs, if any, come after months and months of negotiation. So pirates need credits and investors to cover operating costs:

In recent years, as ransoms have climbed, thousands of destitute, uneducated Somali youth have jumped into the hijacking business, and all anyone in Adado knew was that a young upstart named Buggas had taken the Chandlers to a desiccated smudge of a town called Amara, near the coast, and that Amara locals were backing him up. Local support is crucial, because holding hostages — especially for a long period — can become expensive. You need to keep them fed and most important, heavily guarded — so a rival pirate gang or Islamist militia doesn’t rekidnap them. Paul figures it was costing Buggas nearly $20,000 a month to hold them hostage: with around $300 per day spent on khat; $100 a day on goats; maybe a couple hundred more for tea, sugar, powdered milk, fuel, ammunition and other supplies. Then there’s payroll— in the Chandlers’ case, cash for the pirate raiding party and their 30 henchmen who rotated as guards on shore. On top of this come the translators, who charge a hefty fee to interact with the hostages and negotiate a ransom.

Pirates tend to operate on credit — borrowing all these resources from community members or other pirates, who will then get a cut, or in Somali, a sami, once a ransom is delivered. In Amara, rumors quickly began to fly that the Chandlers were rich — possibly even British M.P.’s — and were therefore the ideal sami opportunity.

“People were saying it would take just two months for a ransom and then they would get double,” Aden remembered. “They invest $5,000, they get $10,000 back. That’s a good return, right?”

According to lawyers who handle piracy cases, pirate translators tend to be educated men from within the community who work for several different pirate gangs and are typically paid a flat fee, which can reach $200,000 — they are essentially white-collar pirates.

Members of the British Somali community took an active interest in the Chandler’s plight and started leaning on folks back home to release them.

But Buggas and the gang didn’t budge. They needed their money. Their operating expenses were growing daily, and by this point they had many creditors — some of them heavily armed — who were expecting to be paid back.

… [But] Buggas was not actually in charge. … “He was working for three or four investors who were making the decisions.”

In many Somali piracy cases, a committee of investors or creditors fronts the cash for the piracy mission, and it’s up to the head gunman to deliver a tidy profit. But finally it seemed to dawn on Buggas and his creditors that they weren’t going to make much of a profit on this one. Stephen and Ali were negotiating a payment under a half-million dollars, all the Chandler family could afford and, for the pirates, a humiliating fraction of what corporate shipowners typically pay.

The whole article is worth a read, particularly for the description of the key role that Somalis in Britain played. And, of course, all the usual issues about the incentives created whenever ransoms are paid.

Read Full Post »

Over on Quora, an anonymous author has a fascinating post about another dimension of Apple’s and Steve Jobs’ brilliance–managing its supply chain:

  1. Apple has access to new component technology months or years before its rivals. This allows it to release groundbreaking products that are actuallyimpossible to duplicate. Remember how for up to a year or so after the introduction of the iPhone, none of the would-be iPhone clones could even get a capacitive touchscreen to work as well as the iPhone’s? It wasn’t just the software – Apple simply has access to new components earlier, before anyone else in the world can gain access to it in mass quantities to make a consumer device. One extraordinary example of this is the aluminum machining technology used to make Apple’s laptops – this remains a trade secret that Apple continues to have exclusive access to and allows them to make laptops with (for now) unsurpassed strength and lightness.
  2. Eventually its competitors catch up in component production technology, but by then Apple has their arrangement in place whereby it can source those parts at a lower cost due to the discounted rate they have negotiated with the (now) most-experienced and skilled provider of those parts – who has probably also brought his production costs down too. This discount is also potentially subsidized by its competitors buying those same parts from that provider – the part is now commoditized so the factory is allowed to produce them for all buyers, but Apple gets special pricing.

Apple is not just crushing its rivals through superiority in design, Steve Jobs’s deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Read Full Post »

The New York Federal Reserve just posted an entertaining analysis of an “Internet blooper” that struck UAL, the parent company of United Airlines a few years ago. As authors Carlos Carvalho, Nicholas Klagge, and Emanuel Moench note in a blog post:

On September 8, 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. Trading volumes skyrocketed during these extreme price movements. In subsequent days, the stock traded as much as 17 percent below its September 8 closing price, and on September 15 it finally traded above the price level seen just before the false news impacted the market.

In short, it took a week for the stock market to flush the “blooper” out of its system.

They then confirm that result using much more sophisticated techniques that allow them to estimate what UAL’s stock price would have been absent the false news:


For bonus points, they also find that similar, but smaller effects on the stock prices of other major airlines.

ht: Paul Kedrosky.

Read Full Post »

Over at the New Republic, Bob Solow offers a thoughful review of Sylvia Nasar’s new book, Grand Pursuit: The Story of Genius. Along the way, Solow provides a characteristically clear explanation of what he views as John Maynard Keynes most important contribution:

Back then [in the 1930s], serious thinking about the general state of the economy was dominated by the notion that prices moved, market by market, to make supply equal to demand. Every act of production, anywhere, generates income and potential demand somewhere, and the price system would sort it all out so that supply and demand for every good would balance. Make no mistake: this is a very deep and valuable idea. Many excellent minds have worked to refine it. Much of the time it gives a good account of economic life. But Keynes saw that there would be occasions, in a complicated industrial capitalist economy, when this account of how things work would break down.

The breakdown might come merely because prices in some important markets are too inflexible to do their job adequately; that thought had already occurred to others. It seemed a little implausible that the Great Depression of the 1930s should be explicable along those lines. Or the reason might be more fundamental, and apparently less fixable. To take the most important example: we all know that families (and other institutions) set aside part of their incomes as saving. They do not buy any currently produced goods or services with that part. Something, then, has to replace that missing demand. There is in fact a natural counterpart: saving today presumably implies some intention to spend in the future, so the “missing” demand should come from real capital investment, the building of new productive capacity to satisfy that future spending. But Keynes pointed out that there is no market or other mechanism to express when that future spending will come or what form it will take. Perhaps God has not yet even decided. The prospect of uncertain demand at some unknown time may not be an adequately powerful incentive for businesses to make risky investments today. It is asking too much of the skittery capital market. Keynes was quite aware that occasionally a wave of unbridled optimism might actually be too powerful an incentive, but anyone in 1936 would take the opposite case to be more likely.

So a modern economy can find itself in a situation in which it is held back from full employment and prosperity not by its limited capacity to produce, but by a lack of willing buyers for what it could in fact produce. The result is unemployment and idle factories. Falling prices may not help, because falling prices mean falling incomes and still weaker demand, which is not an atmosphere likely to revive private investment. There are some forces tending to push the economy back to full utilization, but they may sometimes be too weak to do the job in a tolerable interval of time. But if the shortfall of aggregate private demand persists, the government can replace it through direct public spending, or can try to stimulate additional private spending through tax reduction or lower interest rates. (The recipe can be reversed if private demand is excessive, as in wartime.) This was Keynes’s case for conscious corrective fiscal and monetary policy. Its relevance for today should be obvious. It is a vulgar error to characterize Keynes as an advocate of “big government” and a chronic budget deficit. His goal was to stabilize the private economy at a generally prosperous level of activity.

A second characteristically Keynesian theme meshes very well with the first. In a complex economy, many business decisions have to be made in a fog of uncertainty. This is especially true of investment decisions, as already discussed: a lot of money has to be placed at risk today in an enterprise whose future success can only be guessed. (Much the same can be said of consumer purchases of expensive durable goods.) The standard practice is to focus on the uncertainty and think about it in terms of probabilities, which at least allow for an orderly analysis and orderly decision-making. Keynes preferred to focus on the fog. He thought that some of the important uncertainties were essentially incalculable. They would end up being dealt with in practice by a mixture of apprehensiveness, rules of thumb, herd behavior, and what he called “animal spirits.” The point of this distinction is not merely philosophical: it suggests that long-term investment behavior will sometimes be irregular, unstable, and given to doldrums and stampedes. Expectations can be volatile, and transmit their volatility widely. Passive or perverse policy can be dangerous to the economy’s health.

Solow thus credits Keynes with pioneering the “uncertainty” meme, although in a different sense than many commentators invoke it today.

His whole review is well worth a read if you are interested in the history of economic thought, including Fisher, Hayek, and Schumpeter.

P.S. Solow’s comments on Hayek are less enthusiastic than for Keynes, but he does note that “the Mises-Hayek critique of central planning was convincing (and clearly confirmed by subsequent facts).”

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 109 other followers